Personal Pensions
Occupational pension schemes
10 April 2006
With a final salary scheme the employer guarantees a particular pension on retirement, based on the employee's salary and the number of years he or she has been a member of the scheme, typically on a basis of 1/60th or 1/80th of final salary per year of scheme membership. There is no link between the amount paid in, investment performance and the amount paid out. The employer must contribute whatever is necessary to fund guaranteed benefits. A good final salary OPS might provide a tax-free lump sum of one and a half times average salary over the final three years, plus an index-linked annual pension of 50 per cent of that average salary.
With a money purchase OPS, contributions are invested until retirement and this accumulated fund then provides a pension in retirement. The amount of pension received depends on several factors - the level of contributions, fund performance, charges and annuity rates at retirement. The employer gives no guarantee as to the level of pension.
An OPS may require contributions from its members but this is not compulsory.
Employees wishing to increase their pension investments can take out an Additional Voluntary Contribution (AVC) plan. Members of OPS's can make extra contributions to their company pensions.
AVCs are structured like personal pensions in that they are money purchase schemes and can either be invested with the company pension provider (where they are known as 'in-scheme AVCs') or with a different pension company (Free Standing AVCs - FSAVCs)
New pension rules mean that you can save up to a 100 per cent of your UK earnings a year, subject to a lifetime allowance, currently £1.5 million into your pensions. Any savings above this limit will be taxed at 25 per cent if you take it as pension and 55 per cent if you take it as cash.
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